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From Securities Regulation Daily, September 26, 2018

IM Director Blass discusses Division initiatives with House subcommittee

By Amy Leisinger, J.D.

Investment Management Director Dalia Blass testified today before the House Subcommittee on Capital Markets, Securities, and Investments regarding the Division’s activities and initiatives with regard to the SEC’s mission to facilitate capital formation; maintain fair, orderly, and efficient markets; and protect investors. In response to questions about pending proposals and the success of past rulemaking efforts, Blass stressedthat the Division is working hard to modernize its approach in light of continuing developments in the asset management industry and advancements in technology and business operations.

According to Blass, the Division of Investment Management adheres to three principles in developing and implementing policy initiatives: (1) improving the retail investor experience; (2) modernizing its regulatory framework and engagement with industry participants; and (3) leveraging resources efficiently.

Improving investor experience. To improve investor experience, she noted, the Commission proposed a comprehensive rulemaking package designed to bring requirements and disclosure mandates applicable to financial professionals in line with investor expectations and to educate investors about whether they are dealing with a broker-dealer, an investment adviser, or both. Under the proposal, firms would be required to provide investors with a "relationship summary" highlighting differences between broker-dealers and investment advisers, including services, applicable legal standards, fees, and potential conflicts of interest. To get more feedback from investors, according to the director, the Commission has created a website where investors can view examples of relationship summaries and submit feedback. The Division also developed a recommendation for a proposed interpretation that would reaffirm and clarify the Commission’s views on the investment adviser fiduciary duty standards. When asked by Rep. Stephen Lynch (D-Mass) whether there is a gap between the proposal and the provisions of Dodd-Frank Section 913, Blass stressed that, while minor differences may exist, the core principles remain the same.

Modernizing disclosure. As to efforts to modernize disclosure, Blass noted that the Commission has issued three releases based on the recommendations of the Division to gain insight on ways to improve fund disclosures and examine disclosure effectiveness in light of advances in technology. She also discussed the Commission’s adoption of new Rule 30e-3, which allows funds to satisfy their shareholder-report delivery obligations by making their reports publicly accessible on a website for free and sending paper notices of the availability of the reports to investors by mail. Representative Brad Sherman (D-Calif) applauded the measure’s ability to "save money and save trees" and urged continued focus on additional means by which to conserve resources and create efficiencies.

Modernizing the regulatory regime. To modernize the regulatory regime, Blass noted that the SEC has proposed to allow certain ETFs to operate without applying for individual exemptive orders. Proposed Rule 6c-11 would require an ETF to disclose certain information on its website and would permit ETFs to use baskets not reflecting a pro-rata representation of its portfolio or differing custom baskets if it adopts written policies and procedures setting forth guidelines for the development and acceptance of the baskets that are in the best interests of the ETF and its shareholders. When asked by Subcommittee Chairman Bill Huizenga (R-Mich) how the proposal will help industry participants, Blass explained that exemptive orders can create inconsistencies and that investors may not realize differences between various ETFs. The proposal is designed to combat these inconsistencies and provide a transparent and efficient framework for the types of ETFs that routinely receive exemptions, according to Blass. The proposal also could help facilitate competition and innovation, she said.

In response to inquiries from Rep. Steve Stivers (R-Ohio), Blass discussed the IM staff’s ongoing work on recommendations to modernize the manner in which business development companies (BDCs) and closed-end funds are offered to the market and to harmonize registration and reporting requirements for BDCs with those applicable public corporate issuers. The Division is also considering recommendations to modernize the Advisers Act’s marketing rules by revisiting the prohibition on use of testimonials and the rule governing payments for soliciting business on behalf of registered investment advisers, according to Blass.

Proxies. The Division staff looks forward to the SEC’s upcoming roundtable on the proxy process, particularly in light of the reaction to the Division’s recent withdrawal of two no-action letters regarding advisers’ responsibilities in voting client proxies and retaining proxy advisory firms, Blass said. In response to a query from Ranking Member Carolyn Maloney (D-NY) regarding the withdrawal, Blass explained that, over time, advisers have developed policies and procedures to address conflicts of interest and that the market is much larger now. The roundtable is designed to find out how proxy advisers are being used and how the process currently works and to make sure the 2003 rule is still effective, she said. The Division must ensure that advisers are considering their clients’ best interests when it comes to considering proxy advisor recommendations, Blass concluded.

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